Coordination Problem

Why Austrian Economics is, well, ECONOMICS, and why you should fall in love with economics

It is tradition to give thanks on this day for your blessings. And on a personal level I have a lot to be thankful for.  But these are also tough times for many due to the economic situation.  At the same time, I have come to a renewed appreciation of how fortunate I am to have learned economics and been able to become a professional economist.

Economics is not only a science of profound importance, it is also a way of thinking about the world.  When one looks at the world through the lens of economics all human endeavors take on a new meaning.  I often tell my students that economics is the "sexiest" subject they will ever study.  The rational actor analytics provides a framework that makes sense of human behavior in all walks of life and across time and place.  It is absolutely amazing once you understand the intellectual power the discipline possesses.

Of course there are nuances and the master economist must be subtle as well as blunt.

This combination of sheer intellectual joy in the discipline of thinking like an economist and the the vital importance for humanity of the lessons the discipline has to offer is captured by great economists from Adam Smith to Milton Friedman.  Two of my favorite economists that reflect this mix of joyful intellectual play, and deadly serious policy implications are Kenneth Boulding and G. L. S. Shackle.  A lot of readers misunderstand Boulding and Shackle and view them as economic skeptics.  But nothing could be further from the truth.  Instead, they were economists' economists.  Read Boulding's classic text Economic Analysis, or later works such as A Reconstruction of Economics or better yet The Image, and you will see an economic thinker of the first-rate at work.  Walter Williams once told me that he was depressed in his studies at UCLA and Armen Alchian pulled him aside and told him to read Boulding to fall in love with economics again, and the advice worked.  I understood this first-hand because not only did I have the privilege to read Boulding, I studied with him and interacted with him outside of the classroom (including at his apartment).  He was a teachers' teacher as well.  Boulding is just one of the most amazing scholar/teacher I have ever met.

My interactions with Shackle are more limited to that of a reader of his work.  His Epistemics and Economics is one of the truly great books in economics during the second half of the 20th century.  But again a lot readers misunderstand Shackle's economics and think somehow it rejects the structure of economics I refer to above.  But this just means they aren't reading Shackle closely.  Shackle like Boulding finds great joy in the discipline of the economic way of thinking,and also understands the urgency of economic policy for the practical world of affairs.  Readers who don't understand this aspect of Shackle should read Economics for Pleasure (1959) and An Economic Querist (1973).  Shackle, like Boulding, is a subtle thinker, but he is a hard-core economist.

For all the criticism of "orthodoxy" that one reads in the heterodox literature, one must remember that thinkers such as Mises and Hayek, and Boulding and Shackle, criticize the mechanical interpretation of the logic of choice and the market system, but they do not reject the economic way of thinking or the market process of adjustment through relative prices and in response to the lure of pure profit and the penalty of financial loss.

In short, we have to be forever mindful that Austrian economics is ECONOMICS and that one must never forget that.  No doubt there are philosophical issues at stake, but the discipline of economics (its history, its methods, its theoretical refinement, its policy applications) should be the primary intellectual focus of the student of Austrian economics.  But if you follow the lead of Boulding and Shackle, I promise you that economics will a joyful intellectual exercise, and also the engagement will be of practical urgency.

Be thankful for economics.

Scientific American: An Interview on Pirates

Scientific American's John Matson recently interviewed me about what I argue is the rational choice foundation for pirate behavior, a central theme in my forthcoming book The Invisible Hook. The interview is now available online here.

Market Theory and the Price System: Why Austrians are Influential As Economists Not Just As Social Philosophers

An often repeated fallacy on this blog is that Hayek is the economists favorite non-economist and that explains his citation pattern among elite economists.  It is not only repeated on this blog, but was the crux of Paul Krugman's denouncement of Hayek's influence as an economist.  However, there have been responses to Krugman that provide evidence to the contrary by Caldwell, Garrison and myself.

No doubt Hayek's work on spontaneous order has been influential, but one must remember that invisible hand propositions are at the core of economic science so admiting that Hayek is a major influence on the way economists think about spontaneous order is an admission that Hayek is an influential economist.  Also even the argument that Hayek's work on law and politics is influential turns out to misidentify this work as non-economics and the skeptics should look at the debate these days surrounding the work on legal origins (Shleifer) and constitutions and the origins of democracy (Acemoglu), let alone the influence of Hayek on older thinkers along this lines such as Coase and Buchanan.

But lets take the critics at their word and focus exclusively on technical economics.  As has been pointed out by Stefan Boehm years ago, Hayek's ideas on plan coordination were influential on definitions of equilibrium and on intertemporal coordination in general (Hahn and Arrow and Debreu).  Even that under-estimates Hayek's major influence in technical economics.

Hayek's most important contribution is to demonstrate how the price system actually works.  Economists as diverse in analytical approach and ideological persuasion as Milton Friedman, Herbert Simon, Vernon Smith, and Lawrence Summers can all be found stating that the central insight of the economic analysis of the market economy was best captured by Hayek's work in the 1930s and 1940s.  How does the price system serve to communicate information to dispersed actors within  an economic system so as to coordination the production plans with some with the consumption demands of others and do so in a manner which is wealth creating (realizes gains from mutually beneficial exchange, discovers least cost technologies, and statisfies a diversity of consumer demands)?  The market economy through relative price adjustments, Hayek demonstrated, is able to achieve this in a such a routine manner that we run the risk of taking it for granted. As Hayek put it "The curious task of economics is to demonstrate to men how little they know about what they imagine they can design."

Dave mentioned Jack High's book on market theory, and others have mentioned Steve Thomsen's book as well on this blog before.  Both are highly recommended.  The chapters in Man, Economy and State on the production theory are also outstanding depictions of the price system and its coordinative role in a complex society.  Kirzner's Market Theory and the Price System is also an outstanding work that is often neglected relative to his classic Competition and Enterpreneurship.

However, there are three works which I want to recommend that get at this contribuition of Hayek to economic science.  The books are aimed at different audiences --- policy wonk, businessman, and laymen in general.  But all three focus on Hayek's central insight about the use of knowledge in society.  Thomas Sowell's Knowledge and Decisions; Richard McKenzie's Why Does Popcorn Cost So Much at the Movies; and Russell Roberts's The Price of Everything.  For the aspiring economists in your family or friends I can think of no better holiday gift than one of these books. It also wouldn't be a bad place to start for all the erstwhile critics of Hayek's economics.

Economics and Literature Suggestions

Folks, I'm considering creating a course (undergrad) something like "People, Power, and Political Economy in Literature."

I would appreciate if you could address:

(1) Which colleges have courses like this?

(2) Which books you have used or considered?

(3) Have there been any Liberty Fund gatherings on this topic, or APEE submissions, etc?

Why Research on Anarchism is Not Necessarily Ideological?

A mistaken but recurring theme by some of the commentators to this blog is that modern Austrian economics has been completely taken over by libertarianism and extreme laissez faire.  First, I personally think that sound economics should be policy relevant.  In other words, engagement in contemporary policy debates on the transition from socialism, the plight of underdevelopment, the dynamics of interventionism, and the manipulation of money and credit is a virtue not a vice.  But I also think that if you look closely at the work done by modern Austrian economist on these issues it is decidedly not first-principle libertarianism.  It is instead economic consequentialism in nature.  The focus is on consequences, not violation of rights per se.  And as such is based on economic argument which in turn is grounded in economic theory. [To readers who think economic theory is a dogma I don't really know what to say except read more economics --- a good start for the critically minded might be McCloskey's How to be Human, Though an Economist and in particular her rule #10 -- Learn Price Theory, Which is No Easy Task -- in my experience almost all confusion results from not learning basic price theory, or thinking you learned it when you didn't].

So you don't have to be a libertarian to understand the role that property rights, free price movements, and profit and loss accounting play in guiding resource use, spurring on innovation, and prodding individuals to continually adjust to changing circumstances.  You just have to be an economist.  Simply put: incentives matter, information is necessary, and institutions structure incentives and determine the flow, and quality of the information communicated.

So this question of institutions is looming always in the background.  Most standard price theory treats the institutions as exogenously given, and then examines human behavior within that given environment.  Part of the reason why anarchism has become increasingly a topic of professional concern is the desire to move from treating institutions as exogenous to treating them as endogenous.

Significant economists such as Jack Hirshleifer, Avinash Dixit, Raghuram Rajan have argued that we must assume anarchy and examine the "laws of lawlessness" if we want to get a better (more realistic) examination of the economic process of development.

So anarchy research, I have argued, has gone through various intellectual stages in economics and political economy:

1. Romantic anarchism --- associated with William Godwin and basically utopian;

2. Normative anarchism --- associated with Murray Rothbard and focused on the consistent application of natural rights;

3. Positive anarchism --- associated with Bruce Benson, but also Chris Coyne, where the focus is on empirical studies where the institutions of governance are either lacking or extremely weak and the question is how institutions of governance have historically emerged either through private or public means;

4. Analytical anarchism --- associated in contemporary literature with Peter Leeson, where the focus is on how the mechanisms of self-government work with applications to empirical cases.

If my description is accurate, one can see that all the contemporary thinkers within the Austrian camp are focusing on 3 and 4, and not 1 and 2.  In short, this is not a libertarian take over, but instead an analytical and empirical examination of endogenous rule creation, formation, evolution and enforcement.

And, it is a research program in economics that links older Austrian ideas (e.g., Mises's central proposition about Ricardo's Law of Association) with modern literature in economics (e.g., the institutions rules debate associated with Acemoglu, Rodrik, Shleifer, etc.).

My current working paper with Pete and Chris entitled Comparative Historical Political Economy lays out the argument for the how and why of this research program.  Extreme laissez faire is not mentioned.

Now I can understand how a reader might get confused with a reading only of titles and if they have a set of priors that believe that we cannot distinguish between normative inspirations and analytical examination.  As Schumpeter pointed out, there is an important role for ideology in the social sciences by providing the theorist with pre-analytic cognitive material.  Ideology can inspire an inquiry, it just cannot substitute for inquiry.  The inquiry in all of these exercises is based on "modern subjectivist economics" of Menger, Mises, Hayek, Rothbard, Kirzner and Lachmann, and has roots in the long history of political economy from Adam Smith and John Stuart Mill to Frank Knight to James Buchanan.

So let me speak for myself, though I think it is descriptive of others as well, I am personally of the radical libertarian persuasion, but that provides me with raw material for inquiry.  In short, the puzzles and paradoxes I think about are no doubt influenced by this libertarian outlook.  But I work very hard to focus my approach to these puzzles and paradoxes on the analytical economics of the matter.  I try to follow McCloskey's rules, especially #10, but all of them actually in presenting my argument, and I submit them for academic peer review.  The process of peer review is to make sure that ideological influences are held in check, and that the argumentative structure and empirical evidence provided meets professional standards.  I have had my share of rejected attempts, they force you back to the drawing board and to rethink the exercise.  The secret is to learn from the process, don't become shy due to the process.  Being bold is how you push the boundaries of a science, being professionally responsible is how you assure that your boldness is justified.

The contemporary anarchism research is both bold and responsible.  It is the readers of this blog that have to get caught up to date with the literature in economics.  A good place to start might be my paper "Anarchism as a Progressive Research Program in Political Economy." Of course, a careful reading of any paper by Peter Leeson, or Chris Coyne will do the trick as well.  Their papers (and books) are grounded in analytical puzzles concerning the economics of governance, and the empirical examination of situations where the normal institutions of government are either absent or weak, yet social cooperation doesn't collapse to zero.  I have not once seen either of them invoke a man-qua-man argument or utter the phrase non-aggression axiom in their work.  Instead, it is all about choice theory and the evolution of institutions.  And it represents some of the most innovative and important work in the field of political economy.

BTW, congratulations to Pete and Chris for being recognized by the SDAE for the Best Paper (Pete's JPE piece) and Best Book (Chris's Stanford book) for 2008.

A Forgotten Treasure: Jack High's Maximizing, Action, and Market Adjustment.

Why haven't you read this book?

Well, I know.  It was published in 1990 by Philosophia Verlag GmbH (Munich).  But now that you know that, get your hands on it through your inter-library loan.  The first few chapters offer -- in my judgment -- the best (though brief) comparisons between Austrian disequilibrium constructs and those of neoclassical theory (search, Walrasian, Fisher, Barro & Grossman). 

It's a shame Jack's book was not published through UofM, Elgar, or Routledge, etc.

What Does It Mean to Be an Austrian Economist?

Joe Salerno's SDAE Presidential Address was excellent.  In it he developed his argument about the Mengerian causal realist tradition, and the role that Mises and then Rothbard played in the further development and refinement of that tradition.  Mises used the term "modern subjectivist economics" to capture this tradition.  Joe pointed out that in essays in the 1930s to the late 1960s, Mises actually argued that the label "Austrian" was only useful for an episode of intellectual history.  Similarly, Hayek in his Encyclopedia of the Social Sciences essay on The Austrian School implies that it is a useful historical label that does not have contemporary relevance.

What was most fascinating about Joe's talk was his discussion of Rothbard.  Relying on Rothbard's letters and notes concerning the writing of Man, Economy and State, Joe was able to demonstrate that Rothbard shared this assessment with Mises and Hayek, and was thoroughly engaged with the economics profession of his day (1950s).

In the 1970s, however, Rothbard changed his position and began to advocate a more thorough going commitment to the Austrian School of Economics?  What changed between the 1950s when Rothbard was starting his career, and the 1970s when Rothbard was engaged in efforts to build a modern Austrian movement?

The simple answer is that the economics profession was transformed between 1950 and 1970 in a way that had lost sight of the central message of what Mises called "modern subjectivist economics."  The propositions of the "Austrian School" were ignored so action needed to be taken by Rothbard (and Kirzner) to bring back an apreciation for these core propositions of economic science if economic thought was to advance.

I have recently written a survey article on the Austrian school for David Henderson's Concise Encyclopedia of Economics where I try to stated the 10 propositions that define the Austrian approach.

What do you think sets the Austrian school apart in the discipline of economics and do they warrant viewing the Austrian school as a distinct tradition within economic research and education, with its own schools, journals, conferences, etc., or should contemporary students and faculty simply follow the lead of Rothbard in the 1950s and remain thoroughly engaged with the economics profession?

The Troika Reunited

Well I'm just finishing up from a wonderful few days at the SEA/SDAE meetings here in DC.  The highlight of the weekend for me was a rare appearance by Dave Prychitko.  Dave, Pete, and I had not been in the same physical room with each other for almost ten years.  It was just like old times, as those who were there (and behave yourself in the comments) can attest.  I can't tell you how much fun it was just to be hanging out with them again, feeling like it was 20 years ago.  And Dave was in rare form intellectually, taking no prisoners in the way only he can. Thanks guys. (Poor quality cellphone picture below.)  I'll provide a full SDAE recap in a few days.

Explaining the Great Depression

Tyler Cowen explains the trial and error approach of the New Deal.

Reading Tyler's op-ed led me to remember the lectures on the Great Depression and New Deal that Dr. Hans Sennholz gave to his students at Grove City College when I was first learning economics.  I became an economist because of Sennholz's lectures, his essays and books, and the thinkers he introduced me to through his teaching.

Among contemporary presentations, Bob Higgs's work has been the most intellectual powerful in my opinion.

Who in your opinion has the better presentation of the Great Depression and New Deal as it relates to our current situation?

Yes Virginia, There Is a Role for Cultural Theory

A point was raised in the comments to my previous post, which deserves a separate post, so here goes.

Shouldn't Austrians do or at least acknowledge cultural theory?  (The claim was, if I recall, we don't appreciate its import.)

We've already been there. Back in the day we formed with Don Lavoie a weekly readings group studying cultural theory.  Heck, we even read Roland Barthes' Camera Lucida. I was off on my own reading Adorno's criticisms of the spontaneity of jazz music, Marcuse's criticisms of pop news and entertainment in Time Magazine, and who knows what else.  I still have their books, all marked up, on my shelf. Yes, Frankfort School Theorists, who nevertheless were pioneers in the fields of cultural analysis from, of course, a Marxist-structuralist approach.  Strive to do it over from an Austrian approach.

We went further.  Don and Pete and I attended Peter Berger's three week faculty seminar on Economy, Values, and Culture.  (Yes, Berger the co-author of The Social Construction of Reality.) Pete and I discussed and debated with Dan Rose, the radical ethnographer.  Pete and I wrote up a $10,000,000 proposal to establish a center at the University of Kansas that would focus upon comparative political economy and ethnographic research.  I vividly recall Dan banging on the door to my dorm room, asking what all the noise and debate and laughter was all about.  He was surprised to see only Pete and I, who, in Dan's words, "were manically writing in a fog of ideas and cigar smoke." He could not believe that this was all done in the context of a multi-million dollar grant idea that just popped into our heads.

What's the point?  We were hoping to establish a cultural-analysis program for applied Austrian economics. 

What followed?  Pete went on his "Just Do It" Nike philosophy -- go out and do the ethnography.  One of my main criticisms here was not that our theory wasn't developed enough, but that we (i.e., Pete's students) don't know how to do ethnography.  Ethnography is not simply standing three weeks at a street corner in Moscow taking it all in.  I learned at least this much from the ethnographers (methodological and applied) whom I had read, let alone from Rose's Living the Ethnographic Life.

I had first hand experience:  my original proposal for my Fulbright grant -- which was accepted -- was to "get inside" a bureau of the planning apparatus and try to make sense from the planner's perspective of their everyday life and surroundings.  Language, and esp. political barriers, prohibited such a project.  I still think I could've done a "Jokes from a Planning Office" paper (a twist on Hop Jan's "Notes from a Planning Office").  Hell, I think we should now do a "Jokes from the Treasury Office" paper.

But there have been real successes.  Lavoie and Emily Chamlee-Wright published a book on the subject.  Virgil Storr has been doing fine applied cultural research. 

What about a cultural analysis of the profession?  Well, Pete and I had that idea very early on, and hoped to use some of that 10 mil for a major research project on the impact of the Ford Foundation and the Cowles Commission in shaping contemporary economic theory and debate, tenure, promotion, professional expectations, and so on.

Alas, it hasn't happened.  Maybe Pete and I should edit such a work, and encourage some of Pete's best students to write the chapters.  (Pete, we need $$$!)

Anyway, the call for cultural analysis by and among Austrians is nothing new.  Some of it has already been accomplished.  Some of it is still promising. I don't know of the other heterodox schools that have launched such a project.  If they have, I'd like to see their results.